AM Best, the credit rating agency, has maintained its stable outlook for the United Kingdom’s (UK) life insurance segment, driven by continued strength in pension risk transfers (PRTs), robust investment conditions, and growing revenue from defined contribution (DC) pensions.
Despite certain challenges, AM Best believes the UK life insurance sector remains well-positioned for stability.
In its report, AM Best highlights the enduring strength of the PRT market as a central driver of activity in the UK life insurance space.
In 2024, the segment recorded over GBP 50 billion in PRT premiums. AM Best attributes this high volume to a combination of attractive pricing for defined benefit (DB) scheme sponsors and improved scheme funding levels due to higher interest rates.
These conditions have made de-risking strategies more accessible, encouraging plan sponsors to transfer pension obligations to insurers. AM Best expects PRT volumes in 2025 to remain comparable to those in 2024, with large transactions—so-called “jumbo” deals—continuing to shape the market, typically executed by the largest insurers with the scale to absorb such deals.
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The report emphasises that innovation is increasingly shaping the competitive landscape. AM Best points out that certain insurers are leveraging technology-oriented solutions to streamline the PRT process, making it more cost-efficient and accessible for smaller pension schemes.
Product innovation is also playing a critical role in aligning the interests of insurers and pension sponsors, through mechanisms such as captive structuring that enable a shared risk and reward approach to transactions. AM Best sees this ongoing innovation as a supportive factor for future transaction volumes and broader market engagement.
In assessing the defined contribution segment, AM Best identifies it as a growing source of revenue, bolstered by auto-enrolment and wage growth tied to inflation.
The agency notes that DC members in the UK are largely in the asset accumulation phase, which supports steady growth in assets under management.
Since the rollout of auto-enrolment in 2012, AM Best has observed increasing concentration and consolidation in the market, with scale becoming a critical success factor.
Smaller providers may face competitive pressure as regulatory developments, such as the anticipated Pension Schemes Bill in 2025, are expected to encourage fewer default investment options and introduce minimum thresholds for AUM, further reinforcing industry consolidation. AM Best suggests that these structural changes could reshape the competitive landscape, particularly for providers lacking scale.
Interest rate conditions are another key component of AM Best’s outlook. While future rate reductions are anticipated, AM Best believes current levels are sufficient to support solid investment returns for UK life insurers.
These returns help mitigate reliance on illiquid assets, though AM Best maintains that such assets will continue to play a significant role in insurers’ portfolios given the long-term nature of their liabilities.
Furthermore, the proposed Matching Adjustment Investment Accelerator, which seeks to reduce regulatory barriers to recognition of matching adjustment benefits, could further support insurers’ investment strategies. AM Best considers these dynamics to be supportive of capital adequacy and earnings stability.
The report also draws attention to the evolving regulatory environment, particularly around funded reinsurance. AM Best acknowledges the value of funded reinsurance in facilitating PRT transactions, as reinsurers both underwrite and supply the assets backing annuity obligations.
This allows primary insurers to manage capital requirements more effectively. However, AM Best cautions that increased regulatory scrutiny is warranted. The Prudential Regulation Authority (PRA) has raised concerns about heightened credit and concentration risk, especially in cases where reinsurers operate outside of UK regulatory oversight.
AM Best notes that the PRA’s 2025 Life Insurance Stress Test includes a funded reinsurance recapture scenario, underscoring the need for insurers to ensure robust risk management practices. The report adds that enhanced oversight from the Bermuda Monetary Authority, which supervises a significant portion of global funded reinsurance capacity, may help mitigate these risks.
Overall, AM Best concludes that the UK life insurance sector is maintaining a balanced position, with strong fundamentals in the PRT and DC markets, sound investment conditions, and increasing innovation.
While the industry faces challenges related to regulation and consolidation, AM Best sees these as manageable within the context of the sector’s resilience and ongoing adaptability.
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